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Question - A company has 5 mil shares outstanding at a price of 8 GBP. It decides to make a rights issue of one new share for every 7 old shares. The price of the new share is 3 GBP.
(i) Find the ex-rights price of the stock and the value of the right.
(ii) Is there an increase in portfolio value for the current shareholders? Also, what price change are they willing to accept before they become indifferent to having a right?
(iii) Show that, for the same number of rights and target amount to be raised, a higher or lower price for the new shares does not make a difference for the shareholders.
(iv) What is the effect on shareholder portfolio value if the same amount was to be raised via a cash offer at the same price (3 GBP)? Show numerically.
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